Capgemini stock: low share price could be an opportunity

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Introduction

As it’s been about two years since I last talked about Capgemini (OTCPK:CAPMF) (OTCPK:CGEMY) in this article (paywall); it’s time for an update on the stock. The share price is currently trading at around EUR175, around 25% lower than the 52-week high, but still around 50% higher than the EUR117 the stock was trading at at the time of the previous article’s publication.

Stock Price Chart

Yahoo finance

I highly recommend trading Capgemini shares through the facilities of Euronext Paris, where it trades with CAP as its ticker symbol. The Parisian quotation is obviously more liquid than the American quotation. Capgemini currently has 172 million shares outstanding, representing a current market capitalization of approximately €30 billion. As Capgemini publishes its financial results in euros and its main listing is in euros, I will use the euro as my base currency throughout this article.

For a better understanding of the business model of the company, I would like to refer you to the older article as I will only focus on the current financial situation of Capgemini in this article. Unfortunately, Capgemini’s website mostly contains download links only, but you can find all relevant data and information here.

Cash flow accelerated significantly in the first half

In the first half of this year, Capgemini recorded a turnover of almost 10.7 billion euros in the first half of this year, which represents a substantial increase of almost 25% compared to the 8.7 billion euros in the first half of last year. The cost of services rendered obviously increased as well, but all other operating expenses seemed to have increased in line with the increase in revenue, while Capgemini posted an operating result (confusingly called “income margin”). ‘operating’ in the income statement) of 1.04 billion euros on a turnover of 8.71 billion euros in the first half of 2021 (for an operating margin of 11.96%, the operating margin at first half of this year was about 12.17%). A very moderate margin increase, but which clearly helped boost reported operating profit and net income.

income statement

Capgemini Investor Relations

Net income shows net income of €668 million, of which €667 million is attributable to Capgemini shareholders (the balance of €1 million being attributable to non-controlling interests) and distributed among the 172 million shares outstanding in the first half, EPS was around 3 euros. 88 per share. As Capgemini uses the average number of shares during the semester, EPS was around 3.91 euros.

Cash flow was also very strong, but we need to apply many adjustments before determining normalized operating cash flow. As you can see below, reported operating cash flow was €569 million, but this includes a total investment of €827 million in working capital items. That being said, keep in mind that the company’s tax bill was €327 million based on first-half results, but Capgemini only paid €104 million in cash taxes. , so to be correct, we would have to deduct an additional €223 million in taxes due but not yet paid. It is also necessary to deduct the 74 MEUR of net interest charges as well as the 157 MEUR of reimbursement of rental debts.

Cash flow statement

Capgemini Investor Relations

Taking all of these elements into account, adjusted operating cash flow in the first half was approximately 942 million euros. And with a total capex of 146 MEUR, the free cash flow amounts to nearly 800 MEUR for a free cash flow per share of approximately 4.6 EUR per share. This is significantly higher than the 193 million euros of “organic free cash flow” reported by the company, mainly because this result does not adjust the operating cash flow reported for tax payments and working capital investments.

Calculation of organic free cash flow

Capgemini Investor Relations

It also makes it a bit difficult to fully understand Capgemini’s annual forecast. As you can see below, the company is targeting organic free cash flow for the full year above 1.7 billion euros (which would be close to 10 euros per share). However, as the calculation of organic free cash flow as proposed by the company includes changes in working capital and does not take into account tax differences, it is difficult to say that this is indeed an indication. reliable.

That being said, with adjusted free cash flow nearing 800 million euros in the first half of the year, the company’s forecast probably won’t be too far off.

Orientation all year round

Capgemini Investor Relations

Investment thesis

I clearly missed the boat here as the stock price almost doubled relatively soon after my 2020 post was published. I made money on option premiums because one one of my strategies was to sell put options on the silver. Capgemini is still not expensive at the current share price, as the free cash flow yield will likely reach (or slightly exceed) 10%, while the company’s net debt position was only 4.5 billion euros (excluding rental debt) and just under 4 euros. .1B if you include “cash management assets” (which are bonds and other liquid investments) in the equation.

With an expected EBITDA of around €3 billion in 2023 (excluding lease amortization charges), the debt ratio will be slightly above 1.33 (and falling as Capgemini generates substantial free cash flow) and with an EV/EBITDA multiple just over 11 , the company doesn’t seem outrageously expensive. Maybe I’ll reapply my old strategy of buying put options.

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